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Canadian Dollar Forecast: USD/CAD Drop on the Horizon

Canadian Dollar Forecast: USD/CAD Drop on the Horizon

Justin McQueen, Strategist

CAD, USD/CAD, Analysis and Talking Points

  • CAD Underpinned by Oil Gain
  • Higher Than Expected CPI to Prompt Hawkish Repricing

CAD Underpinned by Oil Gain

The Canadian Dollar has modestly outperformed the rest of the G10 pack, as the commodity currency finds support from the pick up in oil prices. Overnight, the latest API crude oil inventory report showed a larger than expected drawdown of 4.7mln barrels underpinning oil prices. However, should the recent turbulence in Chinese equity markets persist, this can be expected to put a lid on oil prices.

Oil Prices Point to Firmer CAD

Canadian Dollar Forecast: USD/CAD Drop on the Horizon

Source: Refinitiv

Higher Than Expected CPI to Prompt Hawkish Repricing

Aside from oil prices, today’s CPI report may provide the catalyst for participants to reengage with CAD longs should the inflation data print above expectations. Base effects continue to play their part in overstating inflation readings across the globe, Australia being a prime example overnight and thus I expect no different from today’s figure. Reminder, the BoC remain hawkish and will be among the first G10 central banks to raise rates or have at least signalled their intention to do so. That said while there has been growing concerns over the spread of the Delta variant, which has led to an unwind in tightening bets, Canada’s vaccine program is among the top-performing globally.

Economic Calendar

Canadian Dollar Forecast: USD/CAD Drop on the Horizon

Source: DailyFX

That being said, I am cognizant of the fact that the focus will be on the Fed meeting later today, while spot-month end, which is typically USD supportive is likely to grab the attention of some market participants. Therefore, should the inflation data print higher than expectations, my preference would be to trade CAD on the crosses, such as the Euro. Although should spot-month end take USD/CAD to the mid 1.26s, this may be a good area to fade. The initial target on the downside will be the 20DMA situated at 1.2525 with a break below opening the doors to 1.2480-85.

USD/CAD Chart: Daily Time Frame

Canadian Dollar Forecast: USD/CAD Drop on the Horizon

Source: Refinitiv

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